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Keysight (KEYS) Stock Falls Post Analyst Rating Downgrade

Zacks Equity Research

Keysight Technologies, Inc. KEYS has been downgraded from over-weight to equal-weight by Robert W. Baird. Further, Baird analyst Richard Eastman lowered the target price by $8 to $80 per share, triggering a massive decline of 8.9% in the company’s share price on May 20.

Why the Downgrade?

The downgrade can primarily be attributed to Keysight’s connection with the Chinese telecom giant. Huawei. This electronic measurement solutions provider was perceived as a “small direct customer” and was anticipated to gain from 5G technological development with Huawei. The program was focused on technology verification and system program validation.

Keysight generates a significant portion of revenues from outside the United States rendering it susceptible to exchange rate volatility owing to sluggishness in China and trade-war. This in turn is hampering the stock.

Notably, the company’s shares have lost more than 9% in the last three months. Moreover, the stock has gained 20.1% on a year-to-date basis, underperforming the industry’s rally of 26.9%.

 

More Details

Last week, President Trump issued an executive order against Huawei, citing “national security concerns” which require warrant stringent measures against the global telecom major. Notably, Huawei’s CFO, the daughter of the company’s CEO, was arrested in Canada In December 2019 at the request of U.S. authorities, and is currently under house arrest in Vancouver, British Columbia. She continues to fight extradition to the United States.

In 2018, Huawei bought around $11 billion in supplies from U.S. tech firms. The company planned to develop 5G technology on a global scale. In fact, U.S. broadband companies in rural areas have grown dependent on Huawei equipment and services, which have carried inexpensive price-points relative to competition. This crackdown on Huawei is likely to bring broadband rollout to swaths of American hinterland to a crawl.

Following the President’s latest order amid the U.S.-China trade war, major U.S. tech companies are refusing to supply parts and technology to Chinese telecom giant, Huawei. In fact, Intel INTC, Qualcomm QCOM and Alphabet GOOGL are declining shipments of computer chips and component’s to the company.

Consequently, the impact of the dispute is likely to weigh on Keysight's growth potential.

Upbeat Q1

Keysight delivered first-quarter fiscal 2019 non-GAAP earnings of 93 cents per share beating the Zacks Consensus Estimate by 14 cents. Further, the figure soared 82.4% from the year-ago quarter.

Non-GAAP revenues surged 18% year over year to $1.009 billion. Non-GAAP core revenues (excluding the impact of currency and revenues from acquisitions completed within the last 12 months) increased 20% year over year to $1.018 billion.

Meanwhile, GAAP revenues advanced 20% from the year-ago quarter to $1.006 billion. The Zacks Consensus Estimate for revenues is pegged at $978 million.

Outlook Holds Promise

For the second quarter of fiscal 2019, the company expects GAAP revenues to be in the range of $1.057 billion to $1.077 billion. Meanwhile, non-GAAP revenues are expected in the band of $1.06 billion to $1.08 billion.

The Zacks Consensus Estimate for revenues is pegged at $1.07 billion, indicating an improvement of 8.6%in year-ago quarter.

Non-GAAP earnings per share are projected in the range of 93-99 cents per share. The Zacks Consensus Estimate for current quarter is pegged at 98 cents per share, suggesting growth of 18.1% from the year-ago reported figure.

Eastman stated that “he does not expect the troubles to hurt results in the recently completed quarter, though Huawei and China are expected to be a key topic of the post-earnings outlook discussion.”

Conclusion

On the brighter side, KeySight is benefiting from solid demand of its electronic design and test instrumentation systems, primarily from telecom vendors.

The company boasts of a robust 5G portfolio. The company’s 5G product design validation solutions ranging from Layer 1 to 7 enable telecom and semiconductor companies to accelerate their 5G initiatives. Further, the company’s 5G network emulation solutions facilitate end-to-end processes from development to deployment, accelerating the 5G device architecture.

Additionally, collaborations with Qualcomm, Xilinx and AT&T are expected to strengthen presence in the 5G network emulation market. Notably, the acquisitions of Ixia, Anite and AT4 Wireless have enriched the company’s 5G solutions portfolio.

Keysightcarries a Zacks Rank #3 (Hold).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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